What a mortgage is and how it works

A mortgage is a right that transfers rights to real property from the debtor to the mortgagee. The mortgagee protects himself when lending money to ensure repayment of a debt. The property counts as collateral, excluding movable structures.

It is a limited real right: The mortgagee only acquires the so-called partial right of domination. They are therefore not the new owner and do not have control over the property. They may only dispose of and realize the collateral if the debtor fails to fulfill their obligations.

To understand a mortgage, you should first know exactly what a collateral is. The principle has existed for many years: One person has money (the creditor) and lends another person (the debtor) a certain amount of their assets. To ensure that the creditor gets the money back, they take a collateral from the debtor. If the debtor cannot repay the debt, the creditor can liquidate the collateral and thus obtain the money he has borrowed.

The mortgage is not limited to the land itself, but also encompasses other components on the property. These can include trees, for example, or various types of structures. Condominium ownership or building rights can also be included in the mortgage. Furthermore, the mortgage can extend across multiple properties – if they have the same owner or if the owners are related.

By the way: The term “mortgage” is often used instead of the correct terms “real estate mortgage” or “mortgage certificate.” Strictly speaking, a mortgage consists of the creditor’s claim and the mortgage.

There are different types of mortgages in Switzerland: the mortgage bond and the promissory note (see Article 793 of the Swiss Civil Code). The promissory note generally plays the most important role in practice. Here’s how the two categories differ:

Promissory note: This is not a security but merely a deed. This deed or contract serves as evidence to secure a claim in the future. This type of mortgage can often be created without registration in the land register. The details of the mortgage bond are set out in Articles 824 et seq. of the Swiss Civil Code (ZGB).

Promissory note: The promissory note is a security for a claim. The debtor is liable with the property and their personal assets. In this case, a bank is usually the creditor. Within this category, a further distinction is made between the paper mortgage bond and the registered mortgage bond (paperless). The latter is usually preferred because it is somewhat easier to issue.

The two types of mortgages have slight differences. For example, the mortgage note is generally considered more tangible. It is also easier to transfer and modify (for example, to increase a loan).

A mortgage does not mean the transfer of the property from one person to another. The mortgagee merely receives the right to have the property sold – if the claims are not settled. For this reason, the right falls into the category of limited real rights. The mortgagee may not use the property, nor does it transfer into his possession – neither at the time the mortgage agreement is concluded nor when the claims are overdue and unpaid.

This may not be stipulated in a contractual clause. The mortgagee must sell the property and can thus recoup his money. If a foreclosure auction occurs, he may certainly bid and acquire the property in this way.

The mortgage agreement sets out all the details and general terms and conditions of the mortgage. This agreement is usually drafted by a notary or a lawyer and must be notarized. The following information is typically included in a mortgage agreement:

• Debtor (and possibly the mortgagee, if different)
• Lottery creditor
• Amount of the claim and interest rate
• Pledge office
• Pledged property
• Application to issue a mortgage note and deliver it to the mortgagee
• Possible right of succession

Once the mortgage agreement is completed, signed by both parties, and officially notarized, it is entered in the land register (see Article 799 of the Swiss Civil Code). The mortgage agreement acts as a deed or as proof.

Entry in the land register is carried out at the land registry office. The debtor must apply for this. A fee is charged for the notarization, which varies depending on the canton. In the canton of Zurich, for example, 1.0% of the pledge amount (at least CHF 100) is due for the notary and the entry in the land register. Issuing a paper mortgage often costs slightly more.

After confirmation, the creditor—be it a bank or another financing provider—can release the amount to the debtor.

If a debtor fails to pay their debt, the mortgagee can officially demand payment. First, the debtor is requested to pay – by means of a payment order from the debt enforcement and bankruptcy office. The debtor can then acknowledge or dispute the claim. Typically, the mortgagee can begin the realization process after six months.

If repayment is not made, the mortgagee can file an application for realization with the debt enforcement and bankruptcy office. If this application is approved, a foreclosure auction usually follows. This is how the creditor gets their money. In a foreclosure auction, the creditor can also purchase the property themselves by bidding the highest bidder.

There are, of course, alternatives. Whether these are used depends entirely on the creditor’s goodwill. For example, longer deadlines can be granted to repay the debt. Furthermore, the debtor is permitted to sell the mortgaged property. This way he can get money to settle the claims.

Once the debt has been repaid, the mortgage deed can be deleted. However, this does not happen automatically – the debtor must apply for it at the land registry office and requires the creditor’s consent. Article 826 of the Swiss Civil Code stipulates that a debtor can request deletion.

This is not necessary or advisable in every case: A mortgage can certainly be retained. This makes it easier to borrow money again in the future, and the construction costs will not be due again. In this case, the paper mortgage deed can be transferred to your own name, for example. The land registry office will also handle this.

Be careful with paper mortgage deeds: They can only be deleted or altered if the paper document is available. Therefore, you must not lose the original document under any circumstances – otherwise, you may face a complex process.

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